Pointing out some important details

Your main objective when writing a will is to declare who will inherit your property. However, you also need to consider other important points that affect you and your loved ones. You should have a good grasp of the issues in the following sections.

Facing the limits of wills

While a will is a potentially powerful document, there are limits to what you can do through one. In this section, we look at the major limits of wills and help you consider other ways to meet your objectives.

The following are outside the reach and control of your will:

• The ownership of jointly held property: The disposition of some assets is controlled by law. When you own property with someone as joint owners with right of survivorship, for example, your will has no role in what happens to that property. State law dictates that the joint owner automatically receives your share of the property upon your death.
• Assets controlled by other documents: These include retirement plans, annuities, and life insurance. The beneficiary designation form for each of these assets determines who inherits them or benefits from them. We discuss the beneficiary designation for qualified retirement plans, such as IRAs and 401(k)s, later in this chapter.
• Assets in a trust: A will doesn’t influence these assets unless the trust agreement specifically gives you the power to change the terms of the trust through your will or some other means. If you set up a living trust to avoid probate (something we discuss later in this chapter), the terms of that trust determine who receives ownership of the assets.
• Your funeral and memorial arrangements or the disposition of your body: In most states a will doesn’t control decisions about arrangements after you die. You can make suggestions in either the will or a separate document, but generally the final decisions are up to others.

Excluding family members

You may want to exclude a natural object of your affection from your will. That person could be a child or even your spouse. (However, keep in mind that a spouse can’t be disinherited in most states, absent a premarital or postmarital agreement; see Chapter 13.) Children, both natural and adopted, and anyone else can be disinherited.

Yet, there are right ways and wrong ways to disinherit a person if you want to limit problems and fallout. To effectively disinherit a child, for example, you should state the child’s name and that you specifically intended not to leave him or her anything. You don’t have to give a reason, but you can if you want.

Here are a few things to remember if you’re disinheriting someone in your will:

• You shouldn’t disinherit a child by simply not mentioning him or her in the will. In this case, the child could argue that you or the lawyer made a mistake and that the child was supposed to receive an equal share with the others.
• You can’t prevent a disinherited child from suing the estate, but you can limit the potential for a suit through an in terrorem clause. With this clause, you don’t completely disinherit the child. You leave him or her an amount that you think will matter but that’s much less than a full share of the estate. The in terrorem clause, which is permitted in most states, holds that if any beneficiary unsuccessfully sues the estate they lose whatever inheritance they were scheduled to receive in the will.

Avoiding things you can’t do with your will

The general rule about wills is that you can do anything that isn’t “against public policy,” no matter how unwise or crazy it may seem to others. In most states, the only restrictions that are clearly against public policy are those that are racially discriminatory.

So, you can make gifts contingent on the beneficiary’s being married, staying married, or being employed. Occasionally someone writes a will requiring a beneficiary to belong to a certain club or organization or to go to church regularly if they want to receive or retain their inheritances. While these restrictions are for the most part legal, in Chapter 13 we discuss the pros and cons of putting such limitations in estate plans.

As a practical matter, the provisions generally are enforced initially by your executor. He can liberally construe terms or simply ignore them. The probate court judge is the ultimate enforcer but is unlikely to disagree with the executor unless a beneficiary to the will sues. In a few rare cases, a state attorney general may get involved if a will term is particularly disagreeable.

Recognizing the importance of a POA

Without the POA (or a living trust, which we discuss later in this chapter), your finances can’t be managed without your approval. Any property solely in your name, including your business, legally can’t be sold or managed by anyone else. Bills can’t be paid, and your portfolio can’t be managed. Loans can’t be taken out against your assets.

Joint ownership eliminates some, but not all, of these problems. With joint ownership of a checking account, the joint owner usually can write checks to pay bills. But joint owners of property generally can’t sell assets or borrow against them, though the rules vary from state to state and also can be altered by a joint ownership agreement.

To manage your financial affairs when you’re unable to and don’t have a POA, your family must go to court and obtain an order stating that you’re not competent to manage your affairs. This process takes time and money and can be very unpleasant for all involved. In addition, by drafting a POA, you determine who manages your finances. Without it, a court decides, and the person appointed may not be the one you would prefer to handle your financial affairs.

The person named in the POA to act on your behalf is known as an agent or an attorney in fact. This person legally may do in your name anything you can do. If you sign an unlimited power of attorney, the agent has authority to act in your name in all matters. Under a limited power of attorney, the agent has the power to act only on matters that you specify. You may revoke a POA any time you have legal capacity (such as when you aren’t considered incapacitated).

Whether you choose an unlimited or a limited POA, you also want to sign a durable power of attorney. Under the durable POA, the document remains in effect even after you’re incapacitated. A POA, on the other hand, is canceled when you’re unable to handle your own affairs. A potential drawback to the durable POA is that it’s valid as soon as you sign it — even though you aren’t incapacitated. It’s possible that an attorney-in-fact who isn’t trustworthy could take actions at any time.

Some states recognize the springing power of attorney. Under the springing POA, the agent has power only after a disability occurs. A disadvantage to the springing power of attorney is that it must have a definition of disability and a process for having you declared incapacitated. These requirements could make the document less effective than the durable POA, and disagreements could lead to the same court action that the power of attorney was partly created to avoid. In addition, only a few states recognize it.

Choosing the right POA

Of course you want to carefully select your attorney in fact. Naming a spouse or adult child as the agent is tempting — and it may work well in many cases — but it can be risky if those folks don’t have the same ideas about things as you do or aren’t capable of managing your assets effectively.

Consider situations when more than bill paying is required. For example, if the stock market experiences a sharp decline while you’re incapacitated, do you want someone who’s going to panic and sell all your depressed investments or do you want someone who will adhere to your long-term plan? Choose someone who can judge when to change a long-term plan and when to stick with it.

In selecting a POA, you want someone who’s trusted and reliable. You also want someone who’s likely to be around and have the time to take on the position when needed. The person should understand your views and philosophy on managing your finances and have good judgment on financial matters. You may have a simple estate and require someone who’s simply organized and reliable to pay bills. Or you may have a complicated estate and need someone who’s fairly sophisticated or at least wise enough to consult with your advisors and make good decisions.

Be sure to name at least one alternate attorney in fact, because something could happen to the original designee. You can even name more than one attorney in fact and require them to act jointly. Doing so protects against both fraud and bad judgment. It also means they have to be located near each other and meet regularly. These requirements could impede decision making.

After you select your POA, you’ll likely have to prepare and sign many documents. Consider the following:

• Most financial services companies have their own forms and will accept only their forms when someone asserts a power of attorney. They also want copies of the form on file before you’re disabled.
• When you live in more than one state, you may need to provide a different document for each state.

Review the POA as part of your regular estate plan review. Consider whether the attorney in fact is still the best choice, and review the scope of the powers. When you open new financial accounts, be sure the account custodians have copies of a POA they will accept.

Understanding living wills

The living will is the best-known medical directive document. This type of will states that in certain circumstances you want or don’t want certain types of care. The most basic living will states:

“If I have a terminal condition, and there is no hope of recovery, I do not want my life prolonged by artificial means.”

Some living wills span many pages, prescribing the treatment to use or not use in different situations. Creating a living will is simple. Most states recognize living wills and even have authorized sample forms available on their websites.

Despite its popularity, the living will has some important disadvantages you need to be aware of:

• Applying the living will’s simple principles can be difficult in real-world situations. Medical professionals, for example, may disagree over whether you have any hope of improvement. But even when the experts agree, your family members may disagree. If a person’s living will prohibits artificial means of life support, there may be disagreement over whether maintenance care (such as feeding and hydration tubes) is considered artificial life support.
• Adding specific details to a custom living will doesn’t eliminate all problems. Even detailed documents can’t cover all possible scenarios, leaving decision-makers uncertain of what to do. Also, technology and medical knowledge change. Conditions that couldn’t be treated a few years ago can be treated now. Also, people may disagree over the facts, such as the diagnosis, probability of improvement, and whether a person is in a vegetative state.
• Perhaps most important, in many cases, living wills simply aren’t effective. Studies reveal that medical professionals often don’t see the documents until after treatment decisions are made. Some ignore the documents or interpret them differently than what you intended, because they fear surviving family members will sue for failure to treat. In addition, a doctor can interpret a document to approve treatment in a circumstance when others interpret it to withhold treatment. Even when a doctor believes the living will prescribes nontreatment in a situation, treatment still is likely to be given if one or more key family members request it.

Some people disparage living wills because of these drawbacks. Others say these disadvantages are relatively rare occurrences. Because of the uneven performance of living wills, we suggest you not rely solely on them. Despite their imperfections, the family discussions prompted in advance by the crafting of a living will makes them worthwhile in our view. Instead, your estate plan should include more than one medical care document. We discuss additional documents to consider in the following sections. Some estate planning attorneys prepare all these documents as part of their clients’ plans.

Signing DNRs

A simple document called the do not resuscitate (DNR) or do not hospitalize (DNH) order can be helpful for delegating medical decisions. DNR and DNH orders state that the person isn’t to be resuscitated (such as by using CPR) or hospitalized. These documents are becoming common among much older people who are frail, especially those in nursing homes.

Some people sign these documents because they believe additional treatment for new ailments or developments won’t prolong their lives or improve their quality of life. They decline CPR or hospitalization (or both) in advance, instead opting to be kept comfortable in their residences. Advocates of the orders say CPR rarely helps these individuals recover and often makes their deaths violent and painful.

DNR and DNH documents need to be kept in your medical chart with each of your care providers, and any medical personnel who treat you regularly should be made aware of them.

Assigning a healthcare proxy or POA

The healthcare proxy or healthcare power of attorney document appoints one or more people to make medical decisions when you’re unable. This document is similar to the financial power of attorney. The healthcare POA should be in every estate plan.

With the healthcare POA, the agents discuss your situation with your medical providers and make a treatment decision. You may use the other medical care directive documents in this chapter as statements of your wishes to guide the decision-makers. (In the living will and DNR/DNH orders, you state the care you want or don’t want in certain situations. With those documents, you try to make decisions in advance, though you won’t know what all the facts and circumstances will be.)

Naming more than one proxy or agent may be a good idea because it takes some of the responsibility off one person and may ensure a more complete consideration of all the factors. When more than one person is appointed, you may want to require that all agree before treatment can be withheld or given. Some people appoint only family members; others believe at least one proxy should be a person who knows the family but isn’t a part of it.

The people you appoint as healthcare POAs must be likely to be available when medical decisions are needed. Someone who doesn’t live nearby, travels a lot, or generally isn’t easy to get in touch with may not be a good choice.

Authorizing HIPAA

This document authorizes medical providers to release information to the named persons without violating the privacy provisions of the Health Insurance Portability and Accountability Act of 1996. Without this document, medical professionals won’t generally share information about your medical situation even with your family members or holders of POAs.

Combining documents

One estate planning innovation is to combine all the medical care directive documents discussed in this chapter into one called an advanced healthcare directive.

In addition to combining the living will and healthcare power of attorney, the directive can include more detailed explanations of your philosophy and preferences in different situations. The document also can include information such as how you want to be made comfortable and be treated as well as other nonmedical decisions. Some directives even have instructions regarding music, grooming, fresh flowers, and other aspects of your environment while receiving care.

Sample all-in-one documents are available, as a package titled Five Wishes, from Aging with Dignity. Go to www.agingwithdignity.org, or call 888-5-WISHES (888- 594-7437). The organization charges modest fees for the documents and has versions for most states.

Naming beneficiaries for your assets

The process for naming a beneficiary for assets such as retirement plans and annuities is simple. Usually the initial contract or account opening form has a space for listing beneficiaries. Be sure to name at least one beneficiary. Contingent or secondary beneficiaries, who would receive the asset in the event the primary beneficiary died, should also be named. When a change is needed or desired, you’ll likely have to complete a second form naming the new beneficiary.

Keep track of your assets that require beneficiary designations on their own forms instead of in your will. Review the beneficiary designations as part of your regular estate plan reviews and change them as needed. Keep a copy of each beneficiary designation form, and be sure your executor knows where to find the forms. There may not be physical forms, however, because many providers now allow designations to be made and changed online. For such accounts, be sure your executor has a list of the investment companies involved, assets, and the information needed to contact those companies and access their websites.

Examining the special case of IRAs

The beneficiary designation of IRAs is especially important to your estate planning. The choice you make, or fail to make, greatly affects the tax treatment of the IRAs after your death. We explain everything you need to know about dealing with IRAs in the following sections.

Avoiding probate: Yay or nay?

During probate the executor files the will and other documents with the court. These documents become a public record unless the court orders them to be sealed, which is rare. Besides putting your information out there for everyone to see, probate also can be expensive and time consuming. Because of the cost, time, and public nature of probate, a goal of your estate plan may be to avoid probate for most of your assets.

You need to carefully decide whether you want to avoid probate. Discuss your state’s probate process with your estate planner. You want to know whether your state adopted the modern, streamlined probate code or still has the old process.

The good news is that many states established a streamlined probate process in recent decades, at least for estates that aren’t large. Probate with the new process costs far less and is much faster than under the traditional process. If you live in a state with a streamlined, low-cost estate process, you may decide that having the estate go through probate is better than dealing with a living trust or the other methods of avoiding probate we discuss in this section.

Other states, however, retain the old system. Probate in these states is expensive, and even simple estates can be tied up in the process for more than a year. If you live in one of these states, avoiding probate is a great gift to your heirs and will save a meaningful part of your estate.

In the remaining two sections we look at the different ways of avoiding probate.

Considering joint tenancy

Joint ownership with right of survivorship is the simplest and oldest form of estate planning. Lawyers often call it a “will substitute” and “the poor man’s will.” Assets avoid probate if ownership is “joint tenancy with right of survivorship” or “tenancy by the entirety.” When one co-owner dies, the other automatically takes full title under the law. Probate isn’t required to establish legal title. (Only a few states recognize “tenancy in the entirety.”) These forms of ownership also provide some protection of the assets from creditors.

Joint tenancy is simple. Each state has “magic words” required in the deed or other title document. Usually the owners must be listed along the lines of “John Smith and Jane Smith, as joint tenants with right of survivorship.” Usually a deed can be filed listing the survivor as sole owner by bringing it and a death certificate to the courthouse.

Some assets — such as checking accounts, small savings accounts, and the principal residence — can be held jointly by spouses, but often it’s best for other assets to be owned separately.

You probably shouldn’t use joint tenancy to avoid probate with most of your assets. Your spouse or other joint tenant automatically gets full title to the property after your death. That prevents you from passing the assets to your children or other beneficiaries; it also stops you from using part of the lifetime estate tax exemption (see Chapter 13). Aggressive use of joint tenancy could waste your entire lifetime exemption and leave the entire estate in your spouse’s estate, where only one lifetime exemption can be used.

Joint tenancy also limits what you can do with the property during your lifetime, such as the following:

• You can only make significant moves with the property with the consent of both owners. When the owners disagree, nothing can happen. As you can imagine, you can run into major problems if the co-owner becomes disabled or legally incompetent.
• You can’t change your mind about who inherits the property once joint tenancy is established. After some years have passed and your estate changes, it may make more sense to name the children or someone else to inherit the property and let your spouse inherit other property. To do that, you first have to disentangle the joint title.

When the estate is large enough to be taxable, joint tenancy may increase taxes. One-half the value of property jointly-owned by a married couple is included in the estate of the first spouse to die. When the joint owner isn’t a spouse, the entire property is included in the estate of the first joint owner to die, unless the other owner can show she paid for her share.

Making use of living trusts

Today, the most frequent way to avoid probate is to use the living trust (also known as the revocable living trust or revocable inter vivos trust). The living trust is a trust you create, serve as initial trustee of, and are the beneficiary of. Married couples may have separate living trusts, or they can create one living trust in which they’re co-trustees and co-beneficiaries.

Your attorney should draft the trust agreement, spelling out the terms of the trust and naming the trustee and beneficiary. By establishing the trust, you’re considered its creator or grantor. You’re named (and perhaps also your spouse) as both trustee and beneficiary. You then transfer ownership of your property to the trust.

One key term of the trust is that it’s revocable, which means you may change any of the trust terms and even may revoke the entire trust and have the assets returned to you.

The living trust has both pros and cons, which we discuss in the following sections.